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Replies to Queries - 4

14 January 2003
Issue: 3890 / Categories:

In the rough?

We act for a private members' golf club, currently classified as a non-profit making organisation for corporation tax purposes and whose members' subscriptions are currently exempted from VAT. (The club benefited from a substantial VAT refund in 1994.)

In the rough?

We act for a private members' golf club, currently classified as a non-profit making organisation for corporation tax purposes and whose members' subscriptions are currently exempted from VAT. (The club benefited from a substantial VAT refund in 1994.)

The club has recently obtained planning permission to build residential property on land owned by the club (involving the demolition of an outbuilding currently occupied by an ex-employee). The freehold of the club is held in a separate dormant limited company on trust for the members.

The club is considering the options available, including selling the land with planning permission to a developer or retaining ownership of the land and commissioning builders to construct the residential property.

Will either course of action result in a reclassification of VAT and corporate tax status and could Customs and Excise reclaim the VAT refunded?

(Query T16,139) - Wood for the trees.

'Wood for the trees' is safe as concerns the VAT refund in 1994. That repayment related to the change in the status of a subscription for a playing member from standard rated to exempt and was of the VAT charged at a time when UK law had failed to comply with the EC Sixth VAT Directive. The only effect on the past, which an exempt sale of the land now would have, might be the loss of input VAT incurred on costs directly related to the proposed development.

The complication of ownership in a dormant limited company is interesting. There has been much discussion in the past of the VAT position when a property is held by trustees on behalf of beneficiaries; for instance, who should opt to tax and how should the VAT registration position be handled? I have not checked the latest guidance from Customs, but I believe that cases are treated individually. It sounds as if this is a bare trust, in which case Customs might accept that the club could opt through its existing registration and thereby recover VAT on professional fees, etc.

However, given that this is a limited company, not just trustees, has the precise legal position been checked? Is there a trust document or is this merely a company owned by the club, which was formed as a convenient way of holding the property? Surely, in the latter case, there would be no 'trust'? The property would be merely held as a club asset and the usual legal entity rules would apply.

Either way, the initial reaction of Customs is likely to be that the company ought to register for VAT if it wishes to opt to tax the sale of the land. Given that the sale proceeds will presumably be received by the company, I suspect one will need a careful exposition of the legal position to discuss with Customs.

That will become even more important if the club carries out the development itself. Though the main building costs for new houses are zero rated, there is always some expenditure carrying VAT. Thus, it will be important to consider which entity incurs that expenditure on the work to be carried out and then creates the zero-rated sales of the completed dwellings, on which depends the right to recover the input tax.

Finally, the club should consider the entire picture. For a members' club to undertake a commercial development is high risk and often inappropriate. Of course, doing it through the limited company would reduce the financial risk, but not the operational one. What will then happen to the proceeds? A new clubhouse or a new course is the obvious answer, and so non-recoverable VAT is in prospect. How about a deal with a developer under which the clubhouse or the course is built at a favourable - but not artificial - price? - John Price.

Customs' views, as set out in paragraph 7.1 of Customs Notice 742 'Land and Property', are that the beneficial owners are the members of the club and thus the transactions need to be taken into account when preparing the VAT return.

When looking at a potential land transaction, it is always necessary to consider whether any clawback of input tax would arise under the capital goods scheme. From the information available, it seems most unlikely in this case that VAT has been recovered on an asset costing £250,000 or more and thus there is no risk of clawback.

The land sale does not affect the exemption for members' subscriptions. On an exempt sale to a developer, the input tax on the costs of obtaining planning permission, etc. is not recoverable unless the de minimis rules apply. The option to tax could be made but this might not encourage a potential purchaser who would have to finance the VAT for a short time.

If the club commissions builders to do the work, then all input tax will be recoverable provided there is a grant of a major interest (i.e. freehold sale or grant of a lease in excess of 21 years). From a VAT point of view, it is a commercial decision. I am not sure whether one should advise a members' club to be involved directly in the hazardous business of house building. - R.N.G.

Extract from reply by Menzies:

The ultimate use of the profit is the key principle to establish when the club considers its options in relation to the planning permission. For the purposes of this answer, it is assumed that any income derived from the transaction is intended to benefit the club rather than the members (either individually or collectively).

In respect of the possible reclassification of the eligible/non profit-making status of the club, this is unlikely to be affected by the proposal in itself, as any profit made is dependent on the use to which it is put. One of the principles underlined in the Kennemer Golf Club case (ECJ C174/00) was that non profit-making status is not affected by a profit in itself. The United Kingdom Government actively supported that contention in Kennemer, pointing out that such clubs could only develop reserves for use later by creating surpluses from which reserves could be created. In fact legal note 2B to Item 3 of Group 9 of Schedule 10 to the VAT Act 1994 allows the application of profits to be made to the continuance or improvement of any facilities made available for the purposes of the club.

Issue: 3890 / Categories:
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